Merchant / Captive Power Post Electricity Act 2003

BySh. M.D. Mundhra

Malana Power Company LimitedLNJ Bhilwara Group

15th October 2003CII – PTC Conference on

“The Power Market Post Electricity Act 2003:Entities, Business Models and Implications”.

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LNJ Bhilwara Group in Power LNJ Bhilwara Group is a Rs. 1700 Cr. diversified

Group. The Group has both Captive Power Plants and Merchant Power Plants.

Captive Power Capacity

15 MW Tawa HEP in MP – Captive for HEG. (For Graphite Electrode)

13 MW WHRS in CG - Captive for HEG. (For Sponge Iron)

25 MW Coal based in MP – Captive for HEG. (Under development) (Graphite Electrode

Expansion) 33 MW DG Sets in Raj, MP - Captive for Textile Mills

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LNJ Bhilwara Group – Pioneers of Merchant Power Plants in India

Merchant Power Plants

86 MW Malana HEP – India’s first and only operating Merchant Power Plant.

Completed in record time of 30 months At a cost of Rs. 3.8 Crs. / MW.

192 MW Allain Duhangan HEP Also being developed as a Merchant Power Plant. Expected to be on stream by 2007-2008, well

ahead of schedule.

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Merchant Power Plants – Generation Except Hydro – other modes of generation delicensed.

For Hydro, CEA approval is required above a certain level. We suggest this limit to be Rs. 2500 Crores (for 500 MW). The Act has increased Scope for merchant power plants

without long term PPA. But, allotment of Hydro Projects in any case is required. Various forms of Competitive bidding based on

‘Royalty’, ‘Upfront Premium’, ‘Rate of Power’ have practically failed.

Unsuitable for Hydro Projects as they are extremely ‘Location Specific’ and have Hydrology and Geology inherent risks.

As a result, now allotment of Hydro Projects to the Private sector is practically at a standstill.

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Suggested procedure for Allotment of Hydro Power Projects (1)

Time is Key in Hydro Power for developer, state and Nation.

1 year of early commissioning of 100 MW Hydro Project means Rs. 12 Crs of additional Royalty for state @12% royalty.

Therefore, ‘Completion Time’ should be the criteria for allotment of Hydro Power Projects to the private sector.

Developers to be shortlisted based on their technical, financial, managerial capability and past track record.

They should be given 1 year for vetting Feasibility Reports (for good projects) or DPRs (if they are available).

They should then Bid for ‘Time for completion of Project’.

Developer with lowest time for completion to be awarded the project with set of incentives / disincentives.

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Suggested procedure for Allotment of Hydro Power Projects (2)

Scheme of Incentives and Disincentives

Project lease period – 40 years from quoted CoD.

Incentive – 50% royalty waiver for early commissioning.

Disincentive for delay – Penalty of 2.5% of annual design energy @ Rs. 2 per kWh (supported by bank guarantee).

Allow Force Majeure and 1 year grace period.

State to take over for delays > 2 yrs from agreed milestones.

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Merchant Power Plants – Selling Options

Directly to Industrial Consumers Subject to payment of surcharge

- No Regulator’s approval required.

To Discoms w/o surcharge –

Needs Regulator’s

approval

To Traders for further sales to

Discoms or consumers

Merchant Power Plants - Sales

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How to encourage Direct Sale to Industrial Consumers?

Indal’s Kochi unit got closed despite offer of Rs. 2.50 / kWh from PTC at Kerala Inter-state Point, due to excessive ‘Surcharge’ (42 paise) and intra-state wheeling charge (35 paise) and Transmission losses charged by KSEB.

Therefore To promote Direct Sale to Industrial Consumers:

Surcharge must be eliminated within 5 years. Within these 5 yrs. – Surcharge to be capped at 50% of the

difference between: Existing Tariff, Tariff negotiated between consumers and generators plus all

wheeling charges. Unless the above is implemented, Third Party Sales will

not see the ‘Light of the day’. Without the above, Merchant Power Plants will be

difficult proposition.

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Surcharge and Captive Power Plants

Industries have two options for meeting their requirements of power:

To put captive power plant – with no surcharge. This would normally not allow economies of scale.

To buy power from Merchant Power Plants at market rates: But decision to set up a captive power plant or go in for PPA

with Merchant Power Plant, will be difficult without knowing the amount of Surcharge and definitive time frame for its elimination and as a result:

Investments made in haste in captive power plants may go waste,

Some states like AP, Karnataka are introducing taxes on captive generation.

This would further complicate the decision making process. In fact in most countries, industries get power at subsidized

rates. So keeping surcharge will make industries uncompetitive.

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Merchant Power Plant – Sale to Discoms (1)

Tariff to be approved by Regulators.

Various Discussion Papers floated indicate retaining the ‘Cost-Plus’ Pricing system.

Cost- Plus pricing rewards inefficiency.

To reward efficiency, instead of deciding cost project-wise, we suggest a band of power prices to be announced annually by the Regulators:

Minimum Price to be based on optimum costing in a particular sector.

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Merchant Power Plant – Sale to Discoms (2)

Maximum Price to be based on actual cost of projects completed during last 3 years. This should include:

RoE during construction period for power projects. (Otherwise for a typical Hydel Project having 6 years construction period, 16 % RoE will translate to only 9 % ROE).

Regulators approval should be required if price does not fall in this band of prices.

The above will increase availability and subsequently market forces will take over.This will give boost to efficient entrepreneurs to put up merchant power plants.

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Merchant Power Plants and Trading Merchant power Plants will also get a boost by

promotion of Trading.

For facilitating more Players in the market, we suggest:

Licensing fee not greater than Rs. 10.00 Lacs per annum. Single Trading license for the entire country – Trading

licenses not to be restricted to geographical areas. No Trading license for Generators as they are already

familiar with nuances of Selling / Trading of Power.

This will allow merchant power plants to supply directly to consumers by meeting their seasonal demands by Trading.

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Under supply / Over supply of power Some mechanism needed to price the over supply/under

supply. ABT in its present form – ineffective as it was originally not

meant to be a rate mechanism, because even at most desirable Frequency of 50 Hz, rate is Rs. 1.4 / kWh.

This has resulted in conversion of scheduled demand into unscheduled demand.

Needs revision to ensure proper pricing of unscheduled generation / consumption.

We propose the following rates for unscheduled power:Now Suggested

At 50.5 Hz Frequency: Rs. 0.00 / kWh Rs. 2.00 / kWh At 50.0 Hz Frequency: Rs. 1.40 / kWh Rs. 2.75 / kWh At 49.0 Hz Frequency: Rs. 4.20 / kWh Rs. 6.00 / kWh

A Chart is depicted in the following slide.

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Chart showing present and suggested rates at different Grid Frequencies

Current Vs. Suggested rates of power at varying grid Frequency levels

0.00

1.40

2.80

4.20

2.00

2.75

4.20

6.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

50.5 50 49.5 49

Frequency levels (Hz)

Rat

es

of

Po

we

r (R

s. /

kW

h)

Current rate of power (Rs./kWh) Suggested rate of power (Rs./kWh)

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Merits of the proposed mechanism

This will make banking easier. Captive Power stations can supply excess

generation to the grid or draw during shortages. This unscheduled interchange can be treated as

per the proposed Frequency based price mechanism.

Traders can also benefit from this mechanism for shortfall / oversupply of power.

This will also help in continuous supply of power to consumers.

They can buy their scheduled requirements through PPAs and for additional requirements, they can use this mechanism.

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Captive Power – Other Issues Captive Power definition is broad and if followed,

could be a key driver of growth. Possibility of varying interpretation by Legal /

Regulatory Authorities. National Electricity Policy should remove all

ambiguities in its interpretation. 5% equity investment of a consumer in a generating

company should entitle him for captive benefit. One IPP can be a Captive for more than one

industrial consumer. If the above is implemented, this could result in

fruitful joint investments in power sector by IPPs and consumers to take advantage of Economies of Scale.

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THANK YOU